Ebbing HODL Waves Signal Bitcoin Bottoms
As bitcoin slices grow older, the less likely they are to move. Dormancy tells us that we are amidst the bottom.
Dear readers,
We observe market cycles through a macro lens, and now through the novel data science of on-chain analysis, where we observe the bitcoin ledger and use the data it provides to navigate the market cycle.
Today we’re discussing coin dormancy. Dormancy is up, and as bitcoin lies in limbo, the less likely it is to move. As bitcoin movement diminishes, a reliable floor is being set underneath the spot price—the tide has moved out to reveal the shore, and the ground is set for the next HODL wave to come.
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When bitcoin stands still, the floor is settling
Although risk sentiment is weak in the broader macro picture, we think the bitcoin bottom is drawing closer from an on-chain perspective—let’s explore that conviction with some visuals.
Our two on-chain charts today are about coin lifespan. On bitcoin’s ledger, the lifespan of all bitcoin slices is observable and maps out microscopic market participant behavior. Data scientists use this information to construct a unique view of what drives the bitcoin-native market cycles.
Bitcoin-native market cycle simply refers to factors that are unique to bitcoin’s monetary structure, and not to do with broader macro factors that impact bitcoin, such as the business cycle and monetary policy.
Here is the percentage of bitcoin’s supply that hasn’t moved in one or more years, currently ticking up to a whopping 65%—the majority of the bitcoin supply in circulation has been untouched in 365 days or more, a staggering figure:
If two-thirds of bitcoin is off the market (not for sale) for an extremely long period of time, the price is driven up when more buyers enter the market bidding for a finite supply—a scenario that has played out in bitcoin twice before. We’ve placed a red-dashed line at two previous instances: in 2016 when this metric peaked, it preceded a great bull run, although it didn’t necessarily line up with the absolute bottom (price or timing); and in 2020, several months after the pandemic liquidation, this metric peaked and once again preceded a major bull run. Using these previous cycles as an indication, dormant supply peaks are springboards for upwards price action.
Is this because of more coins being illiquid (in cold storage) and new market entrants bidding up for a lower amount of available coins? Or, not causal, but just a proxy of the reflexivity between market drawdowns making for unfavorable selling prices, and coins not moving because of that?
In other words: is this causal or circumstantial?
We don’t know. But when data moves in inverse-tandem in previous cycles, it catches our eye and demands attention.
There are more unspent one-year+ old coins than ever before. The tide is out, and we can see where the shoreline begins. It appears to be circling this $20,000 area, bitcoin’s behavioral support.
Finding The Bottom With HODL Waves
HODL Waves are another way of visualizing the ebb and flow of the bitcoin market cycle. Colored bands are organized by coin age (when they were last moved), and it forms a beautiful mosaic of holding in the older, wider purple/blue/green bands, juxtaposed with the rapid buying and selling of the younger, speculative orange and red bands:
This data set is more artistic and less useful, but Realized Cap HODL Waves weighs these age bands based on the average purchase price, it paints a much clearer picture. We have insight into the spending behavior of coins based on the price when it was last moved, but also the time that it has lied dormant.
Notice—the older that dormant coins become (more yellow and green), which also means less traded (less orange and red), the more established the cycle bottom is:
The red and orange bands rising represents speculative buyers entering the market to bid up the price. The red and orange waves falling show their coins aging, usually by selling onto the market, driving the price down. The period we’re in now is ‘floor-setting,’ in which weak market players are replaced with sturdy, concrete, convicted ones—coins are increasingly moving toward people that are unwilling to sell them, hence the speculative red and orange HODL waves disappearing from the market.
Look at every other ‘floor-setting’ period shown (when the yellow waves are the largest)—they all varied in duration, but they all reflect the period during which the bitcoin price establishes a bottom range that subsequently sets the stage for advances. We are confident that we are within the bottom price range for this cycle—how long the price stays in this bottoming area is far less certain.
On-chain indicators are extremely useful in this respect, and we’ll continue folding them into our overall analysis at The Bitcoin Layer.
Bonus: technical and energy bitcoin price analysis
Wonder why we use on-chain, technical analysis, and energy models to create the broadest picture for our TBL Confluence Price? It paints the clearest picture of a bitcoin relative floor because market participants trade using data from all three disciplines. For a look at that proprietary model, we publish it for free at the end of every week, along with our broader market observations and calls in TBL Weekly:
We’ve seen a rapid hash rate recovery, and miners have stopped capitulating from the network. This recovery is allowing our bitcoin production cost metric to find a floor after declining since June, implying that competition is reentering the mining industry, a positive sign for bitcoin’s price:
The final chart for the day is showing the current price relative to the 2017 top and the brief consolidation phase in 2020, setting firm support at $20,000. While we wait with bated breath watching the macro landscape continue to unravel, bitcoin is testing this significant behavioral support level:
If it breaks, look out below. Our bias, which includes macro, behavioral price study, and on-chain analysis, continues to be a hold of these lows.
Until next time,
Nik & Joe
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